The Financial Services Authority's desire to push a principles-based regime onto retail firms is little more than a "pipe dream", according to a senior City lawyer. Philip Rubens, head of Finers Stephens Innocent's financial services group, believes that the regulator's statutory obligation to protect consumers coupled with various European directives largely prevents the proper imposition of principles on non-wholesale firms.

"I can't see that principles-based regulation is going to have a major impact on the retail sector in circumstances where there are going to be rules and regulations that need to be complied with," he told Complinet

The lawyer was speaking following the release of the regulator's 2007 business plan which revealed that £50m over three years would be set aside as part of the move from prescriptive legislation. Firms are facing a near ten per cent hike in their fees to fund the changes.

Rubens used the example of firms generally being unable to sell hedge funds to retail customers, as well as the protections that retail customers are afforded under both UK and European rules.

"Is that going to change whereby there isn't going to be a rule about it but it is somehow going to be covered under a principle? I can't see that happening," he said.

Wholesale revision

The lawyer also questioned whether the FSA would be able to effectively impose its new regime on the wholesale side. The forthcoming Markets in Financial Instruments Directive is one example of this, he noted. Rubens said that because of the European impact on the wholesale side a situation might arise where the FSA would have to set out rules and regulations, where ideally it might only want firms to be bound by general principles.

He added that the principles move could affect the structure of firms' business models.

"It might be that firms decide that the regulatory costs of dealing with retail customers are just too great and they might ultimately decide only to deal with wholesale customers because the compliance costs are too significant," he said.

Small firms have already expressed disquiet over the long-mooted FSA plans, with many openly preferring the finality of a tick-box approach compared with the potential uncertainty that streamlined rules could bring.